Economic commentary from David Oser, formerly chief economist at ShoreBank

May 24, 2011

Empire Builder

James J. Hill was a poor boy, born in Canada in 1838 and blind in one eye. Yet, he became one of the great American railroad tycoons of the 19th century. His signal accomplishment was building the Great Northern Railroad from his home base in St Paul to Seattle, 1700 miles away. Hill earned the nickname, Empire Builder, from this feat. In his later years, Hill became a philanthropist, donating to many religious, educational, and charitable causes, mostly in Minnesota. One of his sons, Louis W. Hill, inherited not only business acumen, but also the desire to contribute to his community. Gifts and bequests from the younger Hill provided the endowment for a charitable foundation that ultimately became the Northwest Area Foundation (NWAF).

The Foundation, which ranks in the top 1% of all US foundations by assets, operates in the eight states through which the Great Northern ran. Its goal is "to reduce poverty and achieve sustainable prosperity." This January, NWAF published a document called "Gaining Perspective: Lessons Learned from One Foundation's Exploratory Decade." It's a courageous, voluntary disclosure of a strategy that failed. In 1996, under the leadership of a new president and CEO named Karl Stauber, NWAF's board developed and announced a new goal worthy of an empire builder: "In 10 years, at least 200 communities with whom the Foundation had partnered would be demonstrably better off." It turned away from its traditional practice of providing short-term, focused grants to non-profit organizations. Instead, NWAF would become "an equal partner" with communities in comprehensive, long-term plans to alleviate poverty. NWAF committed $200 million to achieve its goal. "Gaining Perspective" tells the story of why the goal was not met.

Three ideas in the story stand out. The first is why NWAF decided to make such a radical shift at all. The reasoning of Stauber and the board was faultless: "The activist era of federal domestic policy effectively [had] ended." From Franklin Roosevelt's New Deal to Lyndon Johnson's War on Poverty, the federal government had tried to be, in the words of the old song, "the poor man's friend." By the late 1990s, the old liberalism was near the end of its run. Government programs for those least able to fend for themselves were continually being scaled back and are still at the top of the list for spending cuts. NWAF's insight was that "traditional philanthropy required an activist federal government with broad public support—neither of which exists any longer." NWAF's leap was in thinking it could fill the gap. It called its new vision a "Big, Hairy Audacious Goal," a phrase that evokes 1960's idealism and counter-culturalism. But the world had moved on; a bold vision in a good cause was not enough. NWAF became too focused on the end and lost sight of the means. As a board member who initially supported the strategy later commented ruefully, "My uncertainty was the methodology, not the goal."

The second prominent idea is the meaning of community. The most humbling lesson NWAF learned was what a slippery concept community can be. "A fundamental flaw in the Foundation's theory of change…was that the Foundation could define a given community." Despite the best of intentions, an outside agency cannot create or mold a community. Instead, the agency must bend to the community's sense of its own identity.

One of NWAF's exploratory projects involved groups of poor Latino and Indian farmworkers in Washington's Yakima Valley. When NWAF decided not to fund the groups' strategic plan, group members sued for breach of contract. They claimed NWAF led them to believe that it had obligated itself to provide long-term funding. NWAF won the suit, but only on the technicality that the plaintiffs lacked the legal standing to sue a charitable trust. NWAF's problem in Yakima was that it defined community based on common economic interest among the Valley's Hispanic, Native American, and white residents. In fact, as a board member explained to the authors of "Gaining Perspective," NWAF "eventually learned that the three ethnic groups had a history of disconnection from (and distrust of) one another that could not possibly be overcome by staff or consultants coming into the valley from outside."

The Yakima experience wasn't the worst blow to NWAF's reputation and self-esteem. Far more serious were NWAF's difficulties with what it conceived of as an Urban Indian Coalition in Seattle, Portland, Billings (Montana) and Rapid City (South Dakota). The "coalition" apparently existed more in the minds of NWAF staff than among Native American leaders and tribal groups in those cities. According to Karl Stauber, when the project began in 2003, "NWAF anticipated that it would ultimately enter into a collective long-term relationship with these urban communities and learn from the shared experience." He assumed that a shared sense of community existed among Native American across the four cities. The local groups understood something quite different. They thought that $20 million of separate program funding would be made available to help Native Americans in each city.

NWAF's attempt to impose community was compounded by miscommunication over such fundamental issues as the differences between the Foundation's and the Native American groups' definition of poverty. According to Nichole Maher, Executive Director of the Native American Youth and Family Center in Portland, "Most Native Americans do not define poverty in dollars and cents. Poverty is measured by one's ability to exist. To practice your culture. To speak your language. To get a fair and quality education. To be sufficiently housed. To not have to choose between medicine and food."

The argument was encapsulated in two articles, one by Stauber and the other by Maher, for the journal, Responsive Philanthropy, in 2006. After two years of work and an investment of $650,000, NWAF had decided not to fund the Urban Indian project. Needless to say, the Native American groups were not pleased. Maher, as the underdog, stated the Native American position with eloquence and passion: "When examining the ethics of the intervener, it is important to examine the history and collective experience of any cultural group with whom they may work. For American Indians, this history is steeped in paternalism. There is a very real legacy of historical trauma—and repercussions based on interveners' actions—in the experience of American Indians. Some of the more abhorrent examples include allotment of reservation lands, federal relocation policy, the boarding school system, and tribal termination—all of which constitute an important backdrop for any discussion of our experience." Stauber didn't have a chance. His article in response appeared pedantic, and yes, paternalistic.

Soon afterwards, Stauber left NWAF, and the board revamped its strategy, essentially returning to the earlier model as a maker of grants to non-profits, but with what it hopes is a difference. That difference is the third prominent idea. NWAF intends to "be clear about strategy before you implement." It affirms that "Understanding where you are going, and why, is critical to ensuring that all feet are marching in the right direction." In practice, the Foundation intends to focus more on what it calls the "downside of risk." NWAF will continue to seek innovative ways to alleviate poverty, but it will focus as much on the methodology, as the goal. As the new CEO, Kevin Walker, noted in the introduction to "Gaining Perspective," experimentation always entails the risk of failure, but NWAF is now committed to analyzing its risks up front. That awareness of risk was lacking in the past. Failure, writes Walker, "comes with the territory, and it comes at a cost. I believe we found ourselves unprepared for that reality from 1998 to 2008."

Walker's point is that there's an essential difference between failing with your eyes closed and failing with them open. The difference is the management of risk, both the upside and the downside. Risk management is a discipline I believe in deeply. It involves the identification of risk, the measurement of risk, the mitigation of risk, and the communication of risk to stakeholders. It does not mean that Risk, with a capital "R," can be eliminated; sometimes it doesn't even mean that mitigation can accomplish very much. And it's unfortunately true that failure hurts, whether you are prepared for it or not. It's a mistake, though, to imagine that risk management is an excuse for inaction; just the opposite. The lesson that NWAF learned is that managing "the downside of risk" is exactly what will strengthen the Foundation to move forward to new challenges.

To summarize, "Gaining Perspective" presents a fascinating insight into how a large charitable foundation tried, and failed, to build a poverty-fighting empire. Recognizing the retreat of government from the battle, it attempted to substitute a new brand of philanthropy. Its reach exceeded its grasp, but it learned in the process that community, in all its forms, cannot be imposed from above. The real poverty-fighters are those local organizations, embedded in their communities, that achieve small successes one by one, rather than a "Big, Hairy Audacious Goal." But the last insight is the most important. Don't give up. Learn from your mistakes and try again. So, let's applaud the Northwest Area Foundation for being willing to share its painful experience. That's an act of real bravery worthy of an Empire Builder.

Recommended Reading

David Deutsch: The Beginning of Infinity: Explanations That Transform the WorldWith the possible exception of Ray Kurzweil's The Singularity Is Near, this is the most optimistic book I have ever read. If you choose to read the book, you will understand, among much else, what optimism really is. But, I have to warn you, the book is long and very difficult, being a combination of quantum physics and philosophy. I would not suggest it, if I didn't think it was extremely important, and, especially for younger persons, life-changing and life-affirming in the best senses of those over-used terms.

Liaquat Ahamed: Lords of Finance: The Bankers Who Broke the WorldThis a must-read for anyone interested in history and economics. Ahamed's history is sound and his analysis of how people--even experts--really make economic decisions is exactly on the mark.